How to Use a Self-Directed IRA to Buy Real Estate in Nicaragua

Financing options for buying property in San Juan del Sur & Tola are very limited. Loans from a local bank come with a high interest rate (10-15%) coupled with a cumbersome approval process. Owner financing is an option but not all sellers offer it. What if you could act as your own financier using funds that you have already accumulated? That is exactly what you can do by utilizing a Self-Directed IRA (SDIRA) to buy real estate Nicaragua.

What is a SDIRA?

A SDIRA is like a traditional or Roth IRA, with the same tax benefits and contribution limits, but a SDIRA allows you to invest in a wider array of assets. Traditional IRAs are typically used to purchase mutual funds, bonds, stocks, ETFs, etc. A SDIRA is a type of individual retirement account (IRA) that can hold a variety of alternative investments normally prohibited from regular IRAs. The account is administered by a custodian or trustee but it’s directly managed by the account holder— thus the reason it’s called “self-directed.” A SDIRA allows you to buy real estate and non-publicly traded assets & securities, as well as issue a private note (loan).

How can I acquire a SDIRA?

The steps to set up a SDIRA are straight forward:

  1. Identify a custodian who specializes in SDIRAs to open an account. If you already have a traditional or Roth IRA, your new SDIRA custodian can make a transfer of assets request to your current custodian to transfer a specified amount of funds to your SDIRA.
  2. Once the account is funded you can begin to make investments.

That’s it! Like we said, it’s a straight forward process.

How do I use my SDIRA to purchase property in Nicaragua?

After opening and funding your SDIRA, you are now ready to buy property with it! The purchase process is basically the same but with the following differences:

  1. All funds used to purchase the property, including earnest funds deposits and down payments, must be sourced from the SDIRA.
  2. With the assistance of your real estate agent and lawyer, you must fulfill your custodian’s administrative requirements which is typically a small amount of extra paperwork.
  3. The owner of the property will appear as your SDIRA, not you as an individual.

In 2015 we were certified in SDIRAs by NuView Trust and the RE/MAX Caribbean and Central America Region. We have been able to assist a number of clients in transactions that maximize the full creativity allowed by SDIRAs. Some of these deals involved:

  • Using a SDIRA as a loan vehicle to lend money to a third party for a real estate purchase
  • Collaborating with multiple SDIRAs for a singular investment
  • Distributing a property out of SDIRA for personal enjoyment once the account holder reached the distribution age
  • Investing alongside a SDIRA with your personal funds

What are the restrictions and rules when using a SDIRA to purchase property?

Now that we know how to acquire a SDIRA, and use it to purchase property, it’s important that we understand the rules and regulations that govern a SDIRA. As mentioned, a SDIRA has the same tax benefits as a traditional or Roth IRA. To maintain these benefits the following rules must be adhered to:

  1. An investment made with a SDIRA has to be a passive “arm’s length” investment which does not require sweat equity from the owner.
  2. The SDIRA account holder and their lineal ascendents & descendants cannot live in a property or have personal enjoyment from the property while held in a SDIRA.
  3. All improvements, maintenance, and overall investments towards the property must be funded by the SDIRA. You cannot use personal cash towards improvements nor contribute sweat equity.
  4. If the property produces income, all revenue created by the property must go back to the SDIRA. Just as your profits from stocks or mutual funds go back into your IRA.
  5. If the property is still held by your SDIRA when and if the property is sold, the proceeds will go back to your SDIRA.

Due to this framework, SDIRAs are commonly used to purchase rental properties, rehab projects, land, and commercial properties. It is required that all contractors, property and rental management companies, as well as all necessary service providers, are funded via the SDIRA.

I’m interested in SDIRAs!

Please reach out to us to discuss how you can use an SDIRA to acquire real estate in San Juan del Sur or Tola. We love sharing how this creative investment vehicle can expand your spending power while taking advantage of the tax benefits provided by SDIRAs.

We look forward to hearing from you!